Anyone here who's good with Economics? Have some questions on Money and Banking

hey @broad-camera-13514 I don’t know if I am good at economics but I spent a lot of time understanding money, banking etc. Will try to answer your questions. It would be better to directly ask the questions, so that others could also see and answer them if they are interested 🙂.

@thousands-morning-63911 Great, so I've been reading up on Fractional Reserve Banking and how bank runs occur. Also how the Central banks act as a lender of last resort to bail banks out during crisis. Where does the central bank get liquidity from? What rules and constraints does the central bank adhere to when creating new money?

what do you mean by liquidity for central banks?

@broad-camera-13514 Read up on sovereign bonds issued by the central banks

Central banks have reserves which are raised by selling sovereign bonds like @helpful-gigabyte-47939 said. To your question of banking bail-outs — historically central banks just print more money. “Cmd + P” and give that new paper to banks. It causes all kinds of problems - inflation being the biggest.

@thousands-morning-63911 Currency/cash.

I thought I would formulate an answer for all the questions and update here. But I will add information which is available now so that we can have a discussion. How does RBI earn money • state and central govt pay commission for maintaining govt accounts and raising loans on behalf of govt • central bank invests in treasury bills of developed countries (USA, EU), they earn interest on it (at times they sell if the prices are attractive) • banks have to kept part of their deposits as cash reserve ratio with rbi, to meet unforeseen circumstances • they extend temporary short term loans to banks and govt to meet cash mismatches, they earn interest from it RBI is legally mandated to maintain CPI inflation at 2-6%. It does not have the luxury to pump market with more money. (BOCTAOE) During financial crisis, US treasury printed more money to bail out the banks. (which was bad for many reasons like it reinforced TOO BIG TO FAIL BANKS and didn’t punish bad acting of bakers and banking institutions and most importantly inflation).

@broad-camera-13514 Here is an article to get your research started. You'll need to read through RBI's annual reports, research and statistics to get more up to date numbers.

Thanks @thousands-morning-63911 and @helpful-gigabyte-47939, these are helpful

@broad-camera-13514 Where does the central bank get liquidity from? The assets of RBI are as follows. 1. Cash reserves 2. Physical Gold 3. Treasury bills All 3 assets are liquid. RBI's mandates are currency circulation and maintaining liquidity according to the needs of the economy. So there is no concept of liquidity for RBI.

Gold and bills aren't liquid i.e liquid currency. I was talking about just pure currency and cash. What they print and how much etc

What rules and constraints does the central bank adhere to when creating new money? Let us take an example to understand this. Let's say in this financial year, the whole money in the country is 100 units and an apple costs 5 units. Now let's say RBI wants to make us a "rich country" and prints 900 units and infuses it into the economy. In some time the apple cost more or less grows to 50 units. This doesn't make us rich and actually decreases the value of each unit. For this not to happen, inflation must go at a steady rate and RBI tries to manage this. Read the below article to understand the actual workings. https://www.drishtiias.com/daily-updates/daily-news-analysis/flexible-inflation-target

I get the high level inflation etc. What I'm trying to figure out is something practical and in real-life - How the govt printing X amount of INR lead to an increase in Z specific goods. I want real-life examples of consequences. You misunderstand. Forget the fact that I used liquid. I only mean paper currency. You can't 'print' more gold. Each country has limited gold. I only want to know more about currency that can be printed and increased.

What factors does RBI consider while printing money? • Inflation • GDP • soiled and mutilated notes 1 and 3 are self explanatory India is poised to grow at 7% annually and reach the target of 5 trillion dollar in 4-5 years. As GDP is growing, production expands; income, purchasing power increases; transactions are bound to grow exponentially. To meet the needs of expanding economy and transact seamlessly RBI should increase currency circulation proportionately by gauging the quantum of goods and services available, and also looking at inflation numbers.

Sure man! I understand, even I';m reading this stuff now. I'm learning about the 2008 financial crisis now. A helpful redditor told me to check these out to learn about relevant World Economics

@broad-camera-13514 For 2008 financial crisis, I would suggest you to watch these movies • The Big Short (book is also available) (movie depicting real-life incidents) • Inside Job (documentary with lot of interviews of people involved in the crisis and commentators) • Too Big To Fail (movies depicting real-life incidents from "govt POV") • Margin Call (based on 2008 crisis, but not real) The more you get to know about the 2008 crisis, more of this 🤯 will happen. regarding QE, I will try to read more about it and hopefully understand it 😜. Is that link behind a pay wall?

I went all the way back to BC to understand lol. From the very first coins to the first paper notes, central banks and to the 2008 crisis. Skipped a few parts - 1929 crash, great depression and the bretton woods agreement. Hmm big short and margin call were entertaining but did not understand crap. I watched these 2 videos in the last few days and finally understood everything - MBS, CDOs, CDs and the whole bubble, the crash, the greed and QE. • • And lots of googling. You should read up on QE, it's the primary cause of inflation now apparently. I kinda get it, but still need to dig in more.